1) SEBI has amended the SEBI Prohibition of Insider Trading Regulations 1992 vide a notification dated 19th November 2008 which I briefly highlighted here. There are some far reaching amendments.
2) An important amendment is to the definition of “insider”. As I mentioned earlier, no word has been added or deleted but by dropping a comma and breaking the definition into two parts, a significant change has been made.
a) Before the amendment, an Insider had to, firstly, be a person connected or deemed to be connected to the Company. Such connected person should then either reasonably expected to have access to unpublished price sensitive information (“UPSI”) or should have received it or had access to it.
b) This definition was ambiguous. A person merely receiving UPSI or merely having access to it could also be said to be an Insider, as per one interpretation. It is probably this ambiguity that the amendment tackles though by changing the definition upside down!
c) Now, the amendment says that an Insider:-
i) a person connected or deemed to be connected to the Company and who can be reasonably expected to have access to UPSI. OR
ii) A person who receives or has access to UPSI.
d) Thus, a new category of, what one could call, deemed insiders has been created.
e) Readers may recollect the classic case of the printer of company documents who used the price sensitive information in such documents to deal in their shares and make profit (United States v. Chiarella 445 US 222). Of course, the Supreme Court acquitted this printer since, from, what little I recollect, the allegation was that he violated fiduciary duty to shareholders of the target Company and the Court held that he did not. A version of this case was also fictionalized by the best selling novelist Lawrence Sanders in his novel “Timothy’s Game”. Such a printer would though be an Insider in India as per this amended definition. So would any other person who receive or have access to UPSI.
f) In practice, such a broad definition may cause problems. Taken to its extreme – and I seek readers’ views on this – would even a hard working analyst who takes a lot of effort and puts 2 and 2 and 2 and 2 together and counts 8 also become an Insider since he now has access to UPSI? I feel that the answer is no for various reasons but the law could have said that a link with the Company is specifically required. This may even have also been intended since the words used are that such persons should have “received” or “had access to” UPSI.
3) Going further, listed companies and certain other persons are required to frame a code of internal procedures intended to prevent Insider Trading (“the Code”). The Code should be framed “as near thereto the Model Code” provided. It is now provided that the framing of the Code as near to such model should be “without diluting it in any manner”. Further, the Company should “ensure compliance of the same”.
4) Disclosures of holding and changes therein are now required in respect of even dependents (as defined by the Company) of the directors or officers of the listed company. Disclosure of such changes is now also required to be made to the stock exchanges. Disclosure of holdings in derivatives is also to be made when a person becomes a director or officer.
5) The Model Code itself has been amended. There are two major changes.
a) Clause 4.2 of the Model Code has been amended. As per this amended clause, directors/officers/designated employees, who buy or sell shares, cannot now carry out a reverse transaction for six months. Thus, if such person buys even 1 share, he cannot sell any shares for six months and if he sells even 1 share, he cannot buy any shares for six months. Further, such persons cannot deal, at all, in derivatives of the Company. This bar is over and above the general prohibition on insider dealing.
b) The devil in me tells me that the ban is only on such directors, etc. and the dependents of such persons are not affected by such ban!. Of course, such dependent may have to answer to the charge of Insider Dealing generally.
c) This bar also does not apply to Promoters!!! This is absurd. Of course those Promoters who are directors, officers or designated employees would face the bar. So also, the prohibition on Insider Trading generally would continue to apply.
i) The bar also does not apply to other Insiders.
d) This bar on such transactions is total. There are no circumstances – whether of urgent need or otherwise – under which the bar can be lifted. There is also no provision under which even SEBI could grant exemption.
e) An interesting question arises. Does the bar apply also to shares acquired through exercise of employees’ stock options or under a Share Purchase Scheme? This can be seen in two ways. If such a person has sold shares, can he acquire shares under an ESOPs scheme in the next six months? Alternatively, if he has acquired shares under an ESOPs scheme, can he sell shares in the next six months?
i) The crucial word to examine is “buy”. I think there is a good case to argue that the word “buy” would include shares acquired under an ESOPs scheme. However, I still think that shares acquired under ESOPs schemes are not intended to be covered. Consider a related bar on shares acquired through an IPO. The existing clause, continued without any change, requires shares acquired by such persons through IPO should be held for at least 30 days. Obviously, if the intention was to cover shares bought in any manner, then such a separate bar was not required at all. I know the provisions are not happily worded. I also know it could be argued that the 30 day lock in for IPO acquired shares is meant to be a special case. However, taking all things into account, perhaps the intention is not to cover shares acquired under ESOPs Schemes.
ii) A poser for readers. Would such bar apply to sale of shares under a buyback offer by the Company or under an open offer under the Takeover Regulations?
6) There are a few other amendments and issues.
7) A final poser for readers. What are the consequences if a director, etc. violates the ban on reverse transactions or on taking positions in derivatives? More specifically, what if a director buys 10000 shares today and sells them after 15 days (lets focus only on the six month ban for now)? The devil in me gives a strange possible answer which I will share here after one or two days – J.
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